16 Sep 2014

Cash Gifting Systems Exploit Math Illiteracy

Category: MathematicsAdmin @ 8:17 pm

Math-phobic children often grow up to be math-phobic adults. Math-phobic adults are sometimes exploited for their money, even if they do not have much of it.

Although Spark a Playful Mind is mostly about children and learning, I want discuss one of the many “get-rich-quick” schemes my friend recently introduced me to, because it shows the value of playing with mathematics in grown-up life.

This one falls into the category of a “cash gifting system” (known also by similar names, such as the “cash tracking system”). It is a variation on the classic pyramid scheme, but its proponents go to great lengths to convince you otherwise. If you work out some representative mathematical equations, you soon realize that an ever expanding number of people need to be recruited in order for the people just before them to make money.

For the sake of doing some math based on very conservative assumptions, I made calculations on a model wherein everyone involved recruits exactly two people – one to get back the initial “gift” and the second person to make a profit. See my calculations on my previous post.

At somewhere between 32 and 33 waves of new recruits, the entire estimated 2015 world’s population of just over 7 billion people will have joined. If that could actually happen, the best case scenario is that when there are no more people who haven’t already joined, almost 3 billion people would have lost money on the deal, while about 1-1/3 billion would only have broken even. Meanwhile, the first 3 billion other people would have made a profit exactly equaling what the others lost.

The actual, real-life cash gifting version my friend came across is more complicated and would provide more money to the earliest people, creating more people at the end who simply lose money. Money goes up the, um, “chain” or “string” (they won’t say “pyramid”) because you only get to keep what your new recruit pays some of the time.

One of their arguments against it being a pyramid scheme is that they do not send money up the pyramid based on a percentage of incoming money. Instead, you get either all or none of your recruit’s “gift.” OK, I’ll accept that it’s different from other pyramid schemes, but I fail to see how that makes it anything other than a pyramid scheme.

The system uses four different gifting levels: $500, $3,500, $6,500 and $10,500. If you buy in at one level, you can only receive money from people who buy in at your level or below. If a person buys in at a higher level than you did, all the money he gives goes to someone “qualified” to receive it and who bought in before you did. If you simply buy in at $10,500 in the first place, you won’t have to pay more money later to earn (excuse me, receive as a gift) at that high level. People who are uncomfortable with such a large initial “investment” can just buy in at $500 and plan to pay a higher amount later (from their earnings, they hope) to qualify for receiving higher valued gifts.

They are using a strategy well known in marketing circles, which first presents potential customers with a product that is priced considerably above what they are willing to pay and then shows them a lower-cost version that is nevertheless more than they originally anticipated. Customers often set aside other criteria for determining its value and focus on the comparison, which makes the lower-priced product look like a good deal – even if it’s really not.

Thus, when you see four choices for membership where the highest is $10,500 and the second-lowest is $3,500, $500 seems like a bargain. We should become savvy to such psychological manipulation (and pass such wisdom on to our children). $500 is a lot if you only make $2,000 a month, but not so much next to $3,500 or $10,500. It’s amazing how numbers can change people’s perspectives.

The gifting system also plays on the fear that you may lose good money-making opportunities if you buy in at the lowest level. Any recruits you get who want to pay more than you do are giving money that, according to the system, you are not qualified to receive. I am not sure what the rules say about who gets such money, but the new recruit is directed to the rule that if he only paid $500, he cannot take advantage of all possible opportunities. If someone joins with $3,500, he gets nothing.

If instead he joins at $10,500, he has to pass the first $10,500 he receives on (to whom, I wonder), but that “qualifies” him to receive all money after that. And even before he is qualified to receive $10,500 in a single “gift,” he can hope to start recovering his investment because he is already automatically qualified to receive lesser amounts.

Let’s do a math example on that: A person who joins at $10,500 can recruit two people to pay $6,500 each and he will make a profit of $2,500, or he can recruit one at $6,500, one at $3,500, and one at $500 to break even.

Not so hard, eh? The math is simple. We are lulled into believing that if the equation is correct, then the assumptions behind the numbers are correct, too. But here’s the problem: It depends on that word, “can.” You “can” make these dollar amounts. That doesn’t mean you will.

According to my friend, another argument against the “pyramid” designation for the system rests on it having no stable base. Any one person only gives you money once. This begs the question, if your previous recruit later wants to spend more money, which he might do in order to “qualify” himself for a higher level of gift receiving, to whom is he now giving the money, if not you?

In any case, the system promises that you will get money in excess of what you must give initially to join. The recruiters are so reassuring. However, the promise is not a guarantee.

The proponents also claim it is legal. In many places it is clearly is not. (For example, see what the Better Business Bureau and the State Attorney General of Michigan have to say. Another source of informative and well-written articles is the Cash Gifting Watchdog, a private site that’s now six years old but still relevant. A more active site – a bit over-full with ads but still with good info – that is run by Ethan Vanderbuilt, mentions a newer scam and includes reader comments: “Cash Gifting And You Get Paid Fast Scam?” One more article, at Work Home Scam Free, with fun – or annoying – comments by angry devotees, is called “Is Cash Tracking System Great Or Is A Scam?” [sic])

What I find particularly interesting is that people who are attracted to this sort of thing do not look at it mathematically. If they did, they would realize that the best average earning will be exactly zero, and the ones who will make money are the ones who start the system and the first people who buy in, while those who lose money will be the ones who buy in last.

Pardon me, I said “buy.” The money is all supposed to be in the form of “gifts.” I actually meant the mental process of “buying in.” Regardless, I argue that a gift is freely given without expectation of return, and therefore, these are not “gifts.” But I digress.

There are lies, damn lies, and statistics.

Although the origin of the above saying is uncertain (some attribute it to Mark Twain), the sentiment is clear: Numbers are sometimes used to prove an “objective fact” which is neither fact nor objective.

The proponents of these cash systems use numbers as promises while avoiding laying out the entire mathematical model. I have attempted to correct that omission. (Again, see my simplified model showing that it only takes 33 iterations to recruit the entire world, as if the entire world will be willing.)

Some people are duped because of their own math anxiety. To challenge the number, they would have to do the math themselves. They don’t want to think about math, so they don’t, and in their avoidance they blindly accept whatever assertion goes with the number.

After all, they were never good at story problems. The person telling them about it sounds like he understands, so they don’t have to. Besides, he seems nice.

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